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Mellin Transform Method for European Option Pricing with Hull‐White Stochastic Interest Rate

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  • Ji-Hun Yoon

Abstract

Even though interest rates fluctuate randomly in the marketplace, many option‐pricing models do not fully consider their stochastic nature owing to their generally limited impact on option prices. However, stochastic dynamics in stochastic interest rates may have a significant impact on option prices as we take account of issues of maturity, hedging, or stochastic volatility. In this paper, we derive a closed form solution for European options in Black‐Scholes model with stochastic interest rate using Mellin transform techniques.

Suggested Citation

  • Ji-Hun Yoon, 2014. "Mellin Transform Method for European Option Pricing with Hull‐White Stochastic Interest Rate," Journal of Applied Mathematics, John Wiley & Sons, vol. 2014(1).
    • Handle: RePEc:wly:jnljam:v:2014:y:2014:i:1:n:759562
    DOI: 10.1155/2014/759562
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    References listed on IDEAS

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    1. Kaushik I. Amin & Robert A. Jarrow, 1992. "Pricing Options On Risky Assets In A Stochastic Interest Rate Economy1," Mathematical Finance, Wiley Blackwell, vol. 2(4), pages 217-237, October.
    2. Rabinovitch, Ramon, 1989. "Pricing Stock and Bond Options when the Default-Free Rate is Stochastic," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(4), pages 447-457, December.
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